Vietnam: Operational Considerations for Foreign Investments in Vietnam - Part 2

Last Updated: 25 January 2012
Article by Michael Lorenz
  1. Technology Transfer and Licensing
  1. Introduction

    Technology transfers are often an essential part of an investment project. A technology transfer contract which involves the transfer of technology from abroad and/or is paid for by the State budget and has a value of less than US$30,000,must be registered with the Ministry of Science and Technology. Technology transfer contracts which are valued at over US$30,000, and that are paid from the State budget require the said Ministry's pre-approval. Technology may be transferred to a foreigninvested enterprise as a capital contribution, in which case the transferor is remunerated via their share of the company's profits. Alternatively the transfer can occur under a transfer agreement, in which case remuneration is by way of royalties.

  2. Capitalised Transfers

    The capital value of the contributed technology can be agreed amongst the enterprises' investors. However if the technology is overvalued then the investors will be jointly liable for all debts and other property obligations of the company up to an amount equal to the difference between the agreed value and the actual value of the contributed technology.

  3. Noncapitalised Transfers

    Companies are encouraged to calculate royalties for noncapitalised technology transfers as a percentage (maximum 25%) of the aftertax profit which are attributable to sales of the product produced by the transferred technology. Alternatively, royalties may be based on a percentage of the net selling price of the product produced by the transferred technology or on a combination of both calculation methods. Where the combined method is used, a limit of 5% (exceptionally 8%) of the net selling price is imposed. Further the total aggregate rate may not exceed those of the 2 separate methods.

  4. Party rights and responsibilities

    The transferee has the exclusive right to use the technology in Vietnam. They may also develop the technology without the transferor's consent. If the transferor wants to obtain the rights to these developments they must enter into an agreement with the transferee on the principle of mutual benefit. The transferee may require the transferor (or a court or other competent State body) to take action against any third party which infringes the technology's intellectual property rights. Further the transferor must assist the transferee in any claim in connection with the technology's intellectual property rights.

    The parties must notify one another of any new technical and scientific knowledge which will affect the implementation of the agreement, and they must consider the possibility of amending (or even cancelling) the agreement in light of any such developments.

    The content of the technology transfer agreement is mostly determined by the parties. However the anticompetitive provisions which are set out below are prohibited:

    • provisions which compel the transferee to obtain, inter alia, materials and equipment from a specified source;
    • provisions under which the transferee agrees to reduce, inter alia, production or prices in exchange for the transfer; and
    • provisions which restrict the transferee's right to export or to develop the technology or to obtain similar technology from other sources.
  1. Licensing

    While outright transfers of technology are encouraged, Vietnam law also recognises licensing agreements.

    A license agreement must be in writing and may be exclusive or non exclusive. The object of a license agreement may be sublicensed unless the agreement specifically states otherwise. The duration of a license agreement may be agreed between the parties so long as it does not exceed the duration of the applicable certificate of protection.

    License agreements between a foreign and local party must be registered in order to be effective against third parties. Further royalties paid under a license agreement will be subject to corporate/personal income tax.

    Finally, it is forbidden to include anticompetitive clauses in the licensing agreement.

  1. Secured Lending

Vietnam permits borrowers to mortgage and pledge a variety of assets. The National Centre for Registration of Security Transactions was established in 2002 and a number of security transactions must be registered there in order to be enforceable. The information which is recorded at the Centre is available to the public. To date the Centre has proven itself to be reliable and efficient.

The Civil Code states that any Vietnamese based person or entity (including foreign invested enterprises) may pledge or mortgage a building in order to secure a "civil obligation". However what is meant by "civil obligation" is not clearly defined. As Vietnam divides contracts between civil contracts and economic contracts, it is possible that a civil obligation is an obligation arising from a civil contract. Economic contracts may generally only be entered into by businesses and relate to production, exchange of goods or the provision of services and other business matters.

  1. Foreign Exchange

It is the responsibility of the foreigninvested enterprise to ensure that it meets its own foreign exchange expenditure requirements. The expectation is that foreigninvested enterprises will export sufficient products to meet their needs. However, in reality companies regularly purchase additional foreign currency at Vietnam's commercial banks.

It should be noted that the government does not guarantee the availability of hard currency, except for certain, special projects. Further, the law stipulates that the Ministry of Planning and Investment guarantees its "assistance" where a foreigninvested enterprise suffers a foreign exchange shortage and is engaged in projects such as:

  • Construction of infrastructure;
  • Manufacture of import substitutes; and
  • Other important projects, of which the government has identified

Vietnamese Dong may be converted and remitted abroad if the foreign exchange is available and the remittance consists of:

  • Profits earned from business operations;
  • Revenue earned from the provision of services and transfers of technology;
  • Principal of and/or interest on a loan;
  • Invested capital; and
  • Any other sum of money and/or assets legally owned by the foreign investor.

Similarly, foreign employees are entitled to repatriate their Vietnam-sourced income after payment of income tax. All conversions must be made at the official rate set by the State Bank of Vietnam on the date of conversion.

  1. Unfair Competition

Vietnam has no general law on unfair competition. Instead there are a number of laws on the subject, some rather specific and some rather vague, but no complete body of law.

Due to the above, monopolies, cartels, abuse of market share and unfair pricing are not adequately policed in Vietnam yet. Indeed, there are still a number of State-owned monopolies, e.g. EVN in the electricity sector. As noted above certain anticompetitive or monopolistic contract provisions are prohibited. However, there is no definition of what a monopoly is and what steps may be taken to prevent or break up a monopoly.

Further, Vietnam's contract law only contains very general principles regarding this issue. For example a civil contract, must not be contrary to social morality, and it must be based on equality, good will, cooperation and good faith. Equally an economic contract must be based on mutual benefit and equality of rights. However these general provisions do not really offer a sufficient basis to curb unfair and anticompetitive business practices.

The Vietnamese Government is aware of the above mentioned deficiencies and is trying to tackle them. For example, an Anti Trust Agency has been set up in order to improve the situation.

  1. Banking

A foreigninvested enterprise or a party to a business cooperation contract is permitted to open accounts, in both Vietnamese Dong and the relevant foreign currency, with a bank in Vietnam. In special cases, a foreigninvested enterprise or a foreign party to a business cooperation contract may open an offshore account with the permission of the State Bank of Vietnam. However, the law does not define the phrase "special cases".

  1. Insurance

A foreign invested enterprise or a party to a business cooperation contract may purchase life, health, property and civil liability insurance cover. The said insurance may be purchased from a Vietnamese or foreigninvested insurance company licensed to operate in Vietnam.

  1. Labour

All positions must be advertised to local candidates for either 30 or 60 days (depending on the size of the company) before foreign candidates may be considered. Further a foreign candidate should only be chosen if the Vietnamese candidates do not possess the specific skills required for the position. In such situations a local "apprentice" should be hired and then trained to replace the foreigner in due course.

In general terminating labour agreements in Vietnam is a complicated (and sometimes expensive) process. Therefore foreign investors should recruit their employees with care.

Finally, all business enterprises, both local and foreign invested, must be represented by a designated trade union. This can either be a specific union for the enterprise in question or the local general union. Businesses are required to cooperate closely with the union and to create favourable conditions for union activities. Employers must not harass any employee for forming, joining or participating in a union. Labour disputes must be resolved in consultation with the union and in certain circumstances employees have the right to strike.

  1. Accounting and Financial Matters

Foreign invested enterprises and parties to business cooperation contracts may adopt international accounting standards and principles if these are recognized and authorized by the Ministry of Finance. Obtaining such authorisation is not easy. Therefore, most foreigninvested enterprises use the Vietnamese accounting standards.

All records and accounts must be kept in the Vietnamese language, and (if approved by the Ministry of Finance) a widely used foreign language e.g.English or French. Arabic numerals are mandatory. All values must be recorded in Vietnamese Dong or in a foreign currency approved by the Ministry of Finance. All physical materials must be recorded using Vietnam's official units of measurement.

Annual audits are required to be conducted by an independent auditing company licensed to operate in Vietnam. All major international accountancy firms have offices in Vietnam.

  1. Summary

It is essential for foreign investors to understand both the risks and the opportunities of investing in Vietnam. Therefore it is highly advisable to carefully evaluate the current situation in Vietnam before undertaking any sort of investment there.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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